Money

If you can get someone to agree to the following pay scheme you will have $10 million in a month. Just ask them for a penny on day 1, two cents on day two, four on day three, and so on.

In a Ponzi scheme like Social Security, the rate of return is equal to the growth rate of members. With the US population growth rate and Social Security returns around 1% (before considering SS money is spent for other things), you could make significantly more money investing your Social Security tax in basic mutual funds or savings accounts.

A reader asked recently, “What is national debt? It seems both complex and simple. How will it affect the future?”

Indeed, the US national debt is a complicated issue and this is evident in how the nations top economists continue to debate the significance of our debt and its impact on the nation. As the US national debt continues to swell, many people are seeking to understand the issue better. Here are some basic principles and strategies that should set your foundation for understanding the subject.

Types of US Debt

Public debt can be viewed as the actual amount of money the US owes through loans to individuals, groups, and governments.

This is what the government pays interest on right now.

The second type is “gross debt.”

Gross debt includes future obligations like Social Security.

Although future obligations may be covered by future taxes, current tax rates will not bring in enough revenue to cover them.

Today’s public and gross debt levels relative to the size of the US economy (GDP) are higher than they have been since WWII. This has happened since the Iraq invasion around 2003 and can be largely attributed to the post 9/11 economy and recent “Great Recession.” Entitlement spending (Social Security, Welfare, Medicare) has also had a significant impact on the rising gross debt as population growth has slowed and the ratio of people on entitlement programs to those paying for it has increased.

How the US Debt Will Impact Us

As obligations increase, the US government must continue to raise interest rates so that investors are willing to loan the US money. Alternatively, taxes must increase across the board. Either scenario can be harmful to the economy and thus limiting job opportunities and people’s ability to spend effectively. This creates a few potential problems.

As the US government increases interest rates to raise more money, investors may move money out of corporations leading to more government power and inflation.

As interest obligations to debt holders increase, taxes are no longer used to improve the country but instead go to other nations.

If a decrease in infrastructure programs happens before a decrease in entitlement spending then taxes become less and less an investment in economic growth and more of a temporary solution to support those in need.

American companies are considered more risky as the US debt increases causing prices to rise which creates inflation.

What You Can Do

As time passes, the US will either have to cut programs or increase taxes to pay for the problems. Simply increasing debt is not exclusive of these options since it will increase interest payments which decreases the amount of money going to programs. Even if the government never goes bankrupt, its power on the international scale will diminish slowly over time making living in the US less of an advantage. Here are some strategies you can consider to be prepared.

Be thankful that you live in a great economy that provides you with many more advantages than other places. How many people honestly are completely independent from everything else? Even if our country one day fails us, we’ve been very blessed until now. You have to appreciate the benefits along with the losses.

It’s always funny to watch people get jumpy over a fifty-cent coupon on their next pizza purchase and then not worry about the fact that their largest expenses (taxes and healthcare) may change by thousands of dollars one year to the next.

People definitely delight in the occasional saving. It’s a personal “win” and makes you feel like you beat the system. However, if your goal is to use your money a little more effectively, it’s worth knowing the impact of political changes so that you can react (and vote) accordingly.

What Are the Bush Tax Cuts

For starters, the tax cuts passed in the early 2000s had a few significant impacts. Based on 2010 brackets here are the noteworthy numbers versus pre-Bush tax levels.

You will save 5% on the first $8375 you make (~$419)

Plus 3% on income over $34,000 (another $480 for someone making $50K)

Plus $500 per kid (raised child credit from $500 to $1000)

Plus 5% on stock gains and 25% on dividends

Remember that your taxable income is far less than your salary. Just for breathing, the government exempts $3,650 (personal exemption), and because the government knows your a generous giver they assume you have at least $5,700 in deductions (granted if you have more you can deduct that too). So to be taxed as a $50K earner you would really need to make at least $59,350.

What You Can Do

Nothing. It’s politics. Or stop having kids just to get the child credit (I’ve heard they cost more than $1,000 per year to raise anyway).

No, actually there are some worthwhile moves. First and foremost, be knowledgeable. If the tax cuts don’t get extended, you (the average American) will likely bring home $400-800 less in income next year. For those of you who simply spend the amount of money in your bank account each month, you will be fine but you will end up buying less and continuing your saving achievements of zero. If you have a budget on the other hand, you may need to make some minor tweaks, but you should be ok.

Second, read the news. The Democrats basically control the situation right now in D.C. They want to raise taxes but don’t want to mess with people making under $200K. If that’s you, then you’ll likely see no changes in taxes (healthcare is another issue). If you make more than $200K then be afraid, kinda afraid. Your taxes will likely increase by a few thousand dollars and your inability to lavishly spend, donate, or save like you used to may hurt the economy, but that’s up for debate.

Sigh of Relief

So it looks like the pending doom of slightly higher taxes won’t hit/hurt most of us, yet. Larger concerns for your immediate finances are healthcare changes, but I’ll save that discussion for next week. Do be aware that the national debt is swelling quickly and the long term impact is unknown. Even if taxes don’t go up this year, they will go up eventually.

Generous Information Sources

To all my readers new and old, it’s a pleasure to be hosting the Best of Money Carnival this week. This carnival is one of the most well known in the personal finance blogosphere and always features a great collection of personal finance articles. After perusing a long list of outstanding articles, I have picked my favorites. Thanks to all the entries and continue to enter for a chance to be featured.

My Top 10 and Thoughts

Starting with the best, here they are.

The Winner! 11 Great 40 Dollar Investments â€“ A great simple list of ways to spend 40 dollars well. A nice article without all the overwhelming information you see in other blogs.

Taxes aren’t easy. We can all agree on that, but given that we have to do them let’s make the most of it. If I told you that I would pay you $5,000 for 5 hours of your time would you take it? You might ask, “What’s the catch?” The catch is, you have to actually think about your taxes for a few hours, calculate your deductions, and enter it into your tax software. If you do, your tax refund may increase by $5,000 or more.Continue reading Save Five Grand in Five Hours with Tax Deductions→

When you first get a job, change your income, or just start thinking about where to put your money it’s easy to get lost. It’s easy to spend, but if you’re reading this you probably know it’s wise to save. Where should I put my money? How much can I spend? Do I put more in Long term or Short Term savings? All are great questions.

“Two things are certain in life, death and taxes” – Ben Franklin. Get ready to get out the old calculator, pencil, and tax book and spend the next few months figuring out how to file your taxes with Uncle Sam. Better yet, I’m putting together a guide to help make sure taxes this year are as painless as possible. So start here and come back every week for a new tip.

ï»¿ï»¿Roth retirement accounts are almost always considered better than Traditional especially for young people with low incomes. Recently a friend of mine mentioned in interesting new look on the value of Roth retirement accounts (IRA or 401K).